Abstract:

Communal responsibility, a medieval institution studied by Greif (2006), supported the use of
credit among European merchants in the absence of modern enforcement technologies. This
paper shows how this mechanism helps to overcome enforcement problems in anonymous
buyer/seller transactions. In a village economy version of the Lagos and Wright (2005)
model, agents trading anonymously in decentralized markets can be identified by their
citizenship and thus be held liable for each other. Enforceability within each village's
centralized afternoon market ensures collateralization of credit in decentralized markets. In
the resulting equilibrium, money and credit coexist in decentralized markets if the use of
credit is costly. Our analysis easily extends itself to other payment systems like credit cards
that provide a group identity to otherwise anonymous agents.

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